Fed Global Backlash Grows

NEW DELHI—Global controversy mounted over the Federal Reserve's decision to pump billions of dollars into the U.S. economy, with President Barack Obama defending the move as China, Russia and the euro zone added to a chorus of criticism.

Evan Ramstad discusses preparations for Thursday's G-20 meeting, where controversy has grown over the Fed's recent stimulus moves, which China and other nations have protested. Also, Elizabeth Williamson discusses the race to finish a free-trade agreement between the U.S. and South Korea.

Mr. Obama returned fire in the growing confrontation over trade and currencies Monday in a joint news conference with Indian Prime Minister Manmohan Singh, taking the unusual step of publicly backing the Fed's decision to buy $600 billion in U.S. Treasury bonds—a move that has come under withering international criticism for weakening the U.S. dollar.

The Fed is independent, and the White House by longstanding tradition has strained to avoid any appearance of collusion or conflict. Mr. Obama said the administration doesn't comment on particular actions of the U.S. central bank, before adding: "I will say that the Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole."

The prospects of the Fed flooding the financial system with money helped drive gold above $1,400 an ounce on Monday. The precious metal, which investors often buy as protection against inflation, settled at a record $1,402.80 per troy ounce. Other assets, such as U.S. stocks and oil, drifted back slightly on Monday after getting a big boost from the Fed's announcement last week. The dollar fell against the yen, while rising against the euro as worries about Europe's debt problems returned.

The G-20 summit that begins Wednesday night in Seoul is shaping up as a showdown between exporting powers, such as Germany and China, and nations such as the U.S. that are struggling to emerge from recession and high unemployment.

Sarah Palin says she's deeply concerned about the Federal Reserve's plan to buy $600 billion of U.S. bonds to boost the economy. Alan Murray, Jerry Seib and Jon Hilsenrath discuss why the Federal Reserve has been drawn into the political fray.

Ahead of the meeting, tensions have flared in particular between German and U.S. officials. U.S. Treasury Secretary Timothy Geithner has been pressing member nations to sign up for a framework that would set limits on countries' trade balances. Germany, which relies heavily on exports, has lectured Washington about its economic policies, which Berlin sees as profligate and damaging.

Already, expectations are low for the meeting. The G-20 is struggling to agree on specific targets for Mr. Geithner's trade regime. It's also likely to leave unresolved other big questions, such as how to unwind failing international financial institutions, a task made urgent by the recent financial crisis.

Mr. Geithner said he is "very confident" world leaders, including those from China, will agree on a new framework that could instead include warning indicators for when a country's trade balance is out of line.

Germany's criticism echoes that from other countries, including Brazil and Japan, which have complained about potential spillover from the Fed's action. Printing more dollars, or cutting U.S. interest rates, tends to weaken the dollar and makes U.S. exports more attractive. The accompanying rise in the value of other countries' currencies tends to damp their exports and can fuel inflation or asset bubbles, as emerging-market officials note. U.S. officials maintain the Fed's action is about stimulating domestic demand, and that a weaker dollar is a consequence, not an objective.

On Monday, China's Vice Finance Minister Zhu Guangyao said the U.S. isn't living up to its responsibility as an issuer of a global reserve currency. The Fed's move doesn't "take into account the effect of this excessive liquidity on emerging-market economies," he said.

The top economic aide to Russian President Dmitry Medvedev said Russia will insist at the G-20 summit that the Fed consult with other countries ahead of major policy decisions.

Luxembourg Prime Minister Jean-Claude Juncker, who is chairman of the euro-zone finance ministers, also weighed in on the Fed move, saying: "I don't think it's a good decision. You're fighting debt with more debt."

Dissenting voices emerged in the U.S., too. Federal Reserve governor Kevin Warsh, a top lieutenant of Federal Reserve Chairman Ben Bernanke, expressed deep skepticism about the Fed's action in an opinion piece in this newspaper. On Monday, Sarah Palin took aim at the Fed, calling on Mr. Bernanke to "cease and desist" on the bond-buying program. Ms. Palin said, "It's far from certain this will even work" and suggested the move would create an inflation problem.

Over the weekend, Mr. Bernanke said, "We see an economy which has a very high level of underutilization of resources and a relatively slow growth rate. The standard considerations suggest we should be using expansionary monetary policy, and that was the purpose of the action" taken last week.

Underpinning the debate is a growing sense that the international currency system, which has been based on floating exchange rates for most players for more than 30 years, is wearing out. China's policy of keeping its currency artificially low has long caused tensions that have increased of late, as other countries try to export their economies back to health. Now critics are lumping the Fed's policy, known as quantitative easing, into the same category.

German Finance Minister Wolfgang Schäuble lashed out at U.S. pressure on Berlin to rein in the country's surging exports, telling Der Spiegel magazine, "The American growth model...is stuck in a deep crisis."

He said, "It doesn't add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank's printing presses, artificially lower the value of the dollar."

Observers said the blunt criticism of U.S. policy is in large part payback for a longstanding stance by Washington policy makers that the American economy should serve as a model for others. The heated rhetoric also stems from fears that the U.S. may be looking for a back-door way to set exchange-rate policy in a way that favors the U.S.

In his first public comments since Mr. Schäuble's outburst, Mr. Obama seemed set to keep the heat on both Germany and China. "We can't continue to sustain a situation in which some countries are maintaining massive [trade] surpluses, others massive deficits, and there never is the kind of adjustments with respect to currency that would lead to a more balanced growth pattern."

Germany's trade surplus shot up to €16.8 billion ($23.37 billion) in September from €9 billion in August, Germany's federal statistics office reported Monday—larger than the €12 billion economists had expected.

Mr. Obama enlisted an ally in Mr. Singh, an economist whose country is wielding increasing influence at the G-20. Responding to Mr. Schäuble's criticism of the Fed, the prime minister said, "Anything that stimulates the underlying growth impulses of entrepreneurship in the United States would help the cause of global prosperity."

European Central Bank President Jean-Claude Trichet, after a regular meeting with other central-bank heads Monday, said: "Absolutely no participants mentioned that they were pursuing any kind of weak-currency policies." He said the Fed gave the committee a "very precise exposition" of its new policy, but said there was no judgment of, or vote on, its action.

ENLARGE

Corrections & Amplifications

An earlier version of a map accompanying this article incorrectly highlighted Poland instead of Germany to accompany a quote by Germany's finance minister. The above map has been corrected.

An earlier version of this article incorrectly referred to Federal Reserve governor Kevin Warsh as Ken Warsh.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.